Governor Ferguson released his proposed $79.5 billion 2026 supplemental state operating budget on Dec. 23. The Governor’s Proposed 2026 Supplemental Budget and Policy Highlights outlines his priorities and provides an overview of state finances. 

Cuts to Hospitals. The budget proposal includes cuts to hospitals in two key areas: reducing Medicaid payment for outpatient services provided in off-campus hospital-based clinics and carving out the Medicaid pharmacy benefit from managed care, prohibiting 340B entity retail pharmacies from recognizing 340B discounts. While the precise mechanism for “facility fee” cuts to outpatient clinics is unclear, it is estimated to have a -$38 million per year impact on hospitals.

These cuts are part of an effort to fill the state’s projected $2.3 billion deficit over the next four years. The budget deficit is persisting despite tax increases and program cuts included in the 2025-2027 budget enacted during the last session. The state attributes the deficit to rising caseloads, inflation, a cooling labor market and softening housing activity, as well as unprecedented trade shifts and federal spending cuts. 

Bottom Line. Gov. Ferguson’s budget proposal fails to recognize the perilous financial position for hospitals created by state-imposed payment cuts and tax increases and the federal HR 1 enacted in 2025. Not only does the budget fail to provide relief, it also proposes further cuts to Medicaid hospital reimbursement. At a time when many hospitals have had low or negative operating margins for several consecutive years, any further cuts will result in additional cutting of services and loss of access for patients. Many hospitals and health systems across the state have already been forced to lay off staff and make service cuts.

Increased spending and budget cuts. While Ferguson’s budget includes a $1.2 billion spending increase (1.5%) over prior budgets, it has few new programmatic investments and delays or rolls back several previously funded state programs, including early learning and higher education. The budget includes $800 million in agency administrative reductions to help close the budget gap. The Governor also proposes spending $880 million of the state’s rainy-day fund and redirecting $570 million in Climate Commitment Act funds. The proposal includes no short-term revenue increases but does close some sales tax loopholes. The budget achieves the constitutionally required balance over this period. 

Longer-term, the Governor stated his support for a tax on personal income for individuals making more than $1 million annually. If the legislature enacts this new tax, revenue collection would start in 2029. We are concerned the Governor did not propose dedicating any of this new revenue to health care, despite the HR 1 cuts and state-legislated cuts to hospitals.

Release of the Governor’s proposed budget is just the beginning of the state’s budget adjustment process. The Legislature convenes on Jan. 12, 2026. The House and Senate will each release a proposed supplemental budget during the legislative session and work together to craft a final budget by the last day of the 60-day “short” session on March 12. 

Please refer to WSHA’s budget details table for more information about budget items impacting hospitals and health care. 

Hospital-Specific Proposals

  • -$11 million state and -$38 million total in assumed savings related to requiring HCA to pay for clinic services at the same rate regardless of hospital affiliation. Currently, hospital-based clinics are compensated at a higher rate. WSHA strongly opposes this cut and is evaluating its interaction with the hospital Safety Net Assessment.
  • -$7.5 million state and -$20.5 million total reduction from shifting pharmacy benefit from managed care to fee-for-service for Medicaid. This would prohibit 340B entity retail pharmacies from recognizing the 340B discounts but applies to all Medicaid retail pharmacies. This amount only reflects the cuts from January through June 2027.
  • $150 million in federal funds for the Rural Health Transformation Fund. After the Governor released his budget, the federal government announced a total of $181 million to Washington State for the RHTF.

Health Care Coverage Changes

  • $25 million total in continued funding for premiums for lower income individuals purchasing health coverage through the Health Benefits Exchange.
  • -$60 million in state savings due to Apple Health Expansion caseload decrease. A portion of the savings is proposed to be used for a new program to provide limited coverage for patients who are uninsured due to being ineligible for Apple Health coverage or Exchange subsidies.
  • $14 million state and $52 million total for HCA and DSHS to build and upgrade systems to comply with HR 1 eligibility verification requirements.

Complex Discharge

  • $6.3 million state and $18.5 million total to continue the Health Homes program that funds care coordination for Medicaid members with chronic health conditions through 2027.
  • $7.6 million state to add 500 slots for DSHS clients currently receiving DSHS long-term care and developmental disabilities services losing coverage due to immigration status.
  • -$1.9 million state and -$3.6 million total from reducing bed capacity at the Transitional Care Center of Seattle from 80 to 60.

Public Health and Social Supports

  • $3 million state and $4 million total to update the DCYF workload model related to the Keeping Families Together Act.
  • $2.1 million total to fund plaintiff and court monitor obligations tied to the settlement agreement in the 2021 class action lawsuit related to hotel and DCYF office overnight stays for children awaiting placement.

Join us for our Legislative Session webinar Jan. 20

Please join us at noon on Tuesday, Jan. 20 for our annual members only Legislative Session webinar. The event will cover what to expect during the 2026 legislative session and give an overview of WSHA’s legislative priorities and hot topics. It will also include an opportunity to ask questions of WSHA’s Government Affairs leaders and share your interest in advocating on key issues. Register now!